Double Dip

Overnight we got some good news on Italian industrial production. Well, get ready to scrap them as according to Italian Trade Union Confindustria, and validating the collapse as predicted by PMI indicators, Italy's Q2 GDP is now expected to shrink more than 1% in Q2: the worst print since 2009, cementing the country's "double dip", and that real-time industrial output in April, now that LTRO has fizzled, is expected to fall 0.6%. None of this should come as a surprise to anyone: after all the only way the periphery can rise is if it crashes hard enough to force the ECB to intervene again. Finally, the country that is next in line after Spain to nationalize its banks, need some pretext after all. Complete economic collapse will surely make stockholders, of other countries' banks at least, happy, as their Italian counterparty risk will soon be footed by the Italian taxpayers themselves.

After plunging by 19 points in the overnight session, and just touching the 100 DMA, ES has managed to score a recovery, one which has so far clutched at straws, namely stronger than expected German factory orders (+2.2% vs Exp. 0.5%) despite German GDP due in a week which may well push the core European country into the same double dip tsunami which has swept the resto of Europe, if it prints even a slightly negative GDP print. News from Spain that the "bad bank" bailout has started, with Bankia as the first casualty is also lifting spirits as it means that more taxpayer cash will be used to support risk assets. How long this micro euphoria of "bad news is good news" lasts is anyone's guess, but mostly that of the BIS which after failing to defend the 1.3000 EURUSD, has again managed to get the all important pair over the critical support area.

Yesterday we poked fun of Goldman for suggesting that the reason for the late-day sell off was "Prudent profit-taking as folks remember Europe isn’t closed tomorrow." Turns out Goldman could not have been more right: around 4 am Eastern this morning Europe reported a series of economic updates which showed that the European economy continues to be nothing but a slow motion trainwreck and is getting far worse. Starting with final April Eurozone Manufacturing PMI which printed at 45.9 vs an initial print of 46.0, a 9 month low with a core breakdown is as follows: Italian manufacturing PMI 43.8 at a 6 month low, est 47.1 (prior 47.9), German manufacturing PMI at a 33 month low 46.2 vs initial 46.3 (prior 48.4), France manufacturing PMI 46.9 vs initial 47.3 (prior 46.7), which also followed Italy by recording sharpest drop in manufacturing new orders in 3 yrs in April, and so on as can be seen in the chart below. As every sellsider who has opined so far this morning, these numbers are all "hugely disappointing."

As noted earlier, and in the aftermath of both the UK and Spain officially double dipping, very soon a majority of Europe will be submerged under the latest recessionary tide which has already engulfed Spain, UK, Greece, Italy, Portugal, Ireland, Belgium, Denmark, Holland, Czech Republic, and Slovenia. The primary wildcard remains Germany, although there is a more than 50% chance that following some very weak PMI data, the country will follow up its already negative Q4 GDP print with another decline, officially pushing the European growth dynamo into recession as well (as for France which reps and warrants that everything is great, it is not as if anyone actually believes those numbers, especially after Hollande becomes president in one week). For everyone who wants to track the European double dip tsunami in real time, the following interactive chart from Reuters is just for you.

Following this week's ongoing battery of abysmal economic news out of Europe it will hardly come as a surprise that yet another indicator has been released and is pointing to a multi-year low in the deleveraging (elsewhere called incorrectly austere) continent, namely the Euro-area wide confidence index which just slide to the lowest leve since 2009, missing every single estimate and declining sequentially across the board... And with the UK, Greece, Italy, Portugal, Ireland, Belgium, Denmark, Holland, Czech Republic, and Slovenia now in re-recession, and Spain a definitive shoo in next week, the kicker is that German GDP will almost certainly now report a second consecutive GDP print in a few days, thus pushing the entire European continent in a double dip.

It would appear, given the actions and rhetoric of the last week or so, that global central bank printing presses have been switched to 'pause' mode and allowed to cool as implicit inflation 'energy' rears its economic-growth-dragging head around the world (as the bears told us earlier). Whether this leads to a slow grind higher or a tactical correction is the question Morgan Stanley considers in a recent note and their answer is that bullish sentiment, 'under-appreciated' risks, and 'tranquil' markets justify a cautious asset allocation. The focus has switched much more to growth, likely why we have not seen a greater deterioration post-printing yet, but this leaves the market much more sensitive to data surprises (as the backstop of QE has been removed for now). Simply put, we tend to agree with MS' view (given our previous discussions of the volatility surface) that as event and growth risks linger, and with valuations no longer cheap in most cases, expectations of a continued grind higher without a tactical correction are overly confident.

Little that can be added here. The December Case Shiller came, saw, and shut up all those who keep calling for a home price recovery. The Index printed at 136.71 on expectations of 137.11, with the prior revised to 138.24. The top 20 City composite was down -0.5% on expectations of a 0.35% drop. 18 out of 20 MSAs saw monthly declines in December over November, with just the worst of the worst - Miami and Phoenix - posting a dead cat bounce, rising 0.2% and 0.8% respectively. And granted the data is delayed, but the fact that we have now had 8 consecutive months of home price declines even with mortgage rates persistently at record lows, and the double dip in housing more than obvious, can we finally shut up about a housing bottom? Because as Case Shiller's David Blitzer says: "If anything it looks like we might have reentered a period of decline as we begin 2012.” QED

There are those who contend that when fiat dies, gold and precious metals will take its place. Then, a smaller subset out there, claims that it matters not who owns the gold or silver. All that matters is who is in charge of the lead. The following inforgraphic from ammo.net may shed some much needed light on the topic, which as recent Thanksgiving record sales indicated, more and more people are starting to lock in on (and load).

There has been more and more speculation that the Fed is getting ready to launch a new QE program, this one targeting residential mortgages. With the data coming in better than expected, stocks back up, and Plosser and Bullard both chiming in that improving data would make them hesitate or question the need for more QE, there is some fear that it is off the table. We don't think it is off the table, and if anything see growing signs that they are trying to create the political will to get it done. On a day with a somewhat unusually high number of housing-related negative nabobs on Bloomberg TV, Peter Tchir, of TF Market Advisors, thinks Bernanke is trying to lay the groundwork of why it is so important to buy mortgages.